Top 3 Loan Types First Home Buyers Should Know

You can lock in a rate, let it fluctuate, or do a bit of both.

That choice affects how much you pay each month, what happens when you need access to cash, and whether you can repay extra without penalty. Most first home buyers pick their loan type based on whichever option their bank mentions first, but principals tend to think through scenarios before committing. This article walks through the three main structures with examples that show how each one works in practice.

Fixed Rate Loans: Certainty for a Set Period

A fixed rate locks your repayment amount for a chosen term, usually between one and five years. During that period, your repayments stay the same regardless of what the Reserve Bank does with rates. Once the fixed term ends, the loan reverts to a variable rate unless you lock in again.

Consider a principal buying in outer Brisbane at the suburb's current median, borrowing $550,000 with a 10% deposit. They fix the full loan amount at 5.89% for three years. Monthly repayments sit at around $3,700. If variable rates drop to 5.49% during that period, they still pay the fixed amount. If rates climb to 6.29%, they avoid the increase until the fixed term expires.

The downside shows up when circumstances change. Fixed loans usually cap extra repayments at $10,000 to $30,000 per year depending on the lender. If you receive a performance bonus or inheritance and want to pay down the loan faster, you will hit that limit quickly. Fixed loans also carry break costs if you sell the property or refinance before the term ends. Those costs can run into thousands of dollars if rates have fallen since you locked in, because the lender calculates the difference between what you agreed to pay and what they can now earn by lending that money elsewhere. Most fixed products do not allow an offset account, so any spare cash sits in a savings account earning taxable interest rather than reducing the balance on which you pay interest.

Variable Rate Loans: Flexibility and Access to Offset

Variable rates move in line with the lender's decisions, which usually follow Reserve Bank changes but are not bound by them. Your repayment amount adjusts when the lender changes the rate. The main advantage is flexibility: most variable loans let you pay as much extra as you want without penalty, and almost all of them allow an offset account.

An offset account is a transaction account linked to your loan. The balance in that account reduces the loan balance on which you pay interest, without actually paying down the principal. If you have $30,000 sitting in offset and owe $550,000, you only pay interest on $520,000. The $30,000 stays accessible, which matters when you are managing irregular income, covering school term gaps, or holding funds for a planned renovation.

Variable loans also suit buyers who expect their income to grow or who plan to make lump sum repayments. Principals moving into senior leadership roles often see salary increases that allow larger repayments within a few years. A variable structure lets you take advantage of that without hitting a cap or paying a penalty.

The risk is that repayments can rise quickly if rates increase. A $550,000 loan at 5.89% costs around $3,700 per month. If the rate climbs to 6.39%, repayments jump to roughly $3,850. That $150 difference might not sound significant, but it adds up over a year and can tighten a budget that was already calibrated to salary and expenses. When assessing borrowing capacity, lenders test whether you can service the loan at a rate much higher than the current offer, but month-to-month affordability still depends on your actual repayment, and that can shift.

Split Loans: Dividing the Balance Between Fixed and Variable

A split loan divides your borrowed amount across two or more loan accounts, typically one fixed and one variable. You choose the proportions. Common splits are 50/50, but you can also structure it as 70% fixed and 30% variable, or any other combination that suits your risk tolerance and cash flow.

In a scenario where a principal borrows $550,000 and splits it 60/40, they fix $330,000 at 5.89% for three years and leave $220,000 on a variable rate at 5.69%. The fixed portion costs around $2,220 per month, and the variable portion costs around $1,400, giving a combined repayment of roughly $3,620. If variable rates drop, the $220,000 portion becomes cheaper and brings down the overall repayment. If rates rise, the $330,000 fixed portion holds steady and limits the damage. The variable portion still allows full access to offset and unlimited extra repayments, so any surplus income or savings can sit in offset and reduce the interest charged on that $220,000.

Split loans also reduce break costs if you need to sell or refinance during the fixed period, because you only pay the break cost on the fixed portion. If you are relocating for a deputy principal or principal position in another state and need to sell within two years, the penalty applies to $330,000 instead of the full $550,000.

The complexity is administrative rather than financial. You manage two loan accounts, sometimes with different lenders if you are refinancing part of the loan later. Some lenders also charge two sets of ongoing fees, though many now waive fees on splits to stay competitive. It is worth checking the fee structure before committing, because a $395 annual fee on each split adds up over the life of the loan.

How Lenders Mortgage Insurance Fits Into the Loan Type Decision

If you are borrowing more than 80% of the property value, you will usually pay Lenders Mortgage Insurance (LMI). That cost is the same whether you choose fixed, variable, or split, but the way you structure your loan affects how quickly you can get above 80% equity and refinance to remove it. A variable loan with offset lets you park savings and reduce interest without locking those funds into the loan. That means you can build equity faster while keeping cash accessible, which matters if you plan to refinance in two or three years.

Principals may also qualify for LMI waivers or reduced premiums through some lenders, which changes the equation. If you can borrow 90% without paying LMI, the urgency to build equity drops, and a fixed rate might make more sense if you value repayment certainty over offset access. It depends on your cash position and how much you expect your savings to grow in the first few years of ownership.

Choosing Based on Your Situation, Not the Market Forecast

Most buyers try to pick the loan type that will save them the most money if rates move a certain way. That approach assumes you can predict rate movements, which even economists struggle to do consistently. A more reliable method is to match the loan structure to your financial situation and what you need the loan to do.

If your income is stable, your budget is tight, and a rate rise would cause genuine hardship, a fixed loan or a heavy fixed weighting in a split gives you breathing room. If you have surplus cash flow, expect bonuses or salary increases, or want the flexibility to make extra repayments and access offset, a variable loan or a variable-heavy split is usually the right call. If you want some protection from rate rises but do not want to give up offset access entirely, a 50/50 or 60/40 split does both jobs reasonably well.

The loan structure you pick now is not permanent. Most borrowers refinance or restructure within five to seven years, either because their fixed term ends, their circumstances change, or they find a lower rate elsewhere. Refinancing carries some cost, but it is not prohibitive, and it gives you another opportunity to reassess what structure suits your situation at that point. The choice you make as a first home buyer does not lock you in forever, but it should reflect how you operate financially right now, not how you think the market might move in three years.

Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions